World Central Bankers Fretting Over Commodity Inflation-Prepare For Exit & Volatility

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World’s Central Banks Signal End to Emergency Policy ‘Largesse’
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By Brian Swint and Jennifer Ryan

Nov. 6 (Bloomberg) -- The world’s biggest central banks are starting to unwind emergency measures introduced earlier this year to stave off a second Great Depression.

The euro rose after European Central Bank President Jean- Claude Trichet yesterday said his bank will withdraw some liquidity operations, and the pound climbed after the Bank of England slowed the pace of bond purchases. A day earlier, the Federal Reserve outlined the circumstances in which it would be prepared to raise interest rates.

The moves suggest that investors and executives will soon have to do without the flood of liquidity that propped up the economy earlier this year, as concerns about new asset bubbles start to mount. The danger is that mistiming the withdrawal of support could spark swings in currencies and spoil a recovery before it has taken root.

“There are all kinds of risks,” said Jim O’Neill, chief global economist at Goldman Sachs Group Inc. in London. “We don’t know how much of the improvement in markets is due to central banks’ largesse, and neither do they. They’re pretty nervous, but they’ve got to get out of it at some stage.”

The Bank of Japan decided on Oct. 30 to end its programs of purchasing corporate debt in December. The Fed, the ECB and the Bank of England kept their benchmark interest rates at record lows. The Fed left its rate close to zero, the ECB held at 1 percent and the Bank of England remained at 0.5 percent.

The euro rose as much as 0.3 percent against the dollar yesterday and the pound jumped as much as 0.8 percent. The euro traded at $1.4876 and the pound was at $1.6588 as of 4:30 p.m. in New York.

Sugar Prices

Central banks are shifting course as factories restock inventories and the prices of assets from stocks to sugar and gold surge. The MSCI All-Countries World Index has jumped 66 percent since March and sugar has gained 90 percent this year.

“Not all our liquidity measures will be needed to the same extent as in the past,” Trichet said, signaling the ECB won’t renew auctions of 12-month funds next year. The Fed reiterated it will complete housing debt purchases by April.

Bank of England Chief Economist Spencer Dale said Sept. 24 he’s concerned about “unwarranted increases” in asset prices. The central bank said yesterday it will expand bond purchases by 25 billion pounds ($41 billion) to 200 billion pounds, the smallest increase since it started buying bonds in March.

With traders able to borrow at record-low interest rates in the U.S. and Europe, some economists are concerned that markets are becoming distorted, raising the potential for volatility as central banks reverse emergency policies at different speeds.

Overreaction

“As soon as the first exit measures are put in place, there’s the risk that the market overreacts,” said Juergen Michels, chief European economist at Citigroup Inc. in London. “We’ll probably see a tightening of financing conditions, and hard-fought-for improvements will be in jeopardy.”

Nouriel Roubini, the economist who forecast the financial crisis in 2006, said Nov. 4 that investors are milking the “mother of all carry trades.” Brazilian central bank President Henrique Meirelles said Nov. 4 finance ministers and central bankers from the Group of 20 nations will discuss asset bubbles when they meet in Scotland today and tomorrow.

While policy makers in the U.S. and Europe are pulling back unorthodox policies, rate increases may be some way off.

The Fed said Nov. 4 that it may keep borrowing costs “exceptionally low” for an “extended period.” Trichet said yesterday that ECB rates are “appropriate,” signaling he has no immediate plan to increase them, and the U.K. central bank said there will be a “slow recovery.”

‘Frothy’ Markets

Bank of Japan Governor Masaaki Shirakawa and his colleagues on Oct. 30 stressed they have no plan to tighten policy.

“Bubbles, frothy stock markets and booming property prices are not a problem in the U.S., U.K. or continental Europe at the moment,” said Barry Eichengreen, a former senior policy adviser at the International Monetary Fund who now teaches at the University of California at Berkeley. “They are a problem for China and other emerging markets. It’s their central banks that need to tighten, not ours.”

China’s benchmark stock index has risen 73 percent this year and the World Bank said this week that its policy makers must avert stock- and property-market bubbles after lending swelled to a record $1.27 trillion this year.

For now, mounting evidence of a global recovery may encourage policy makers in the Group of Seven nations to keep withdrawing stimulus into next year. Cisco Systems Inc. Chief Executive Officer John Chambers said Nov. 4 he sees a global economic recovery, “with the U.S. leading the way,” fueling a rebound in his company’s sales this quarter.

Manufacturing expanded at the fastest pace in 18 months in China last month and the most in more than three years in the U.S.

“The era of cheap money may be drawing to a close,” said Colin Ellis, an economist at Daiwa Securities SMBC in London and a former Bank of England official. “Central banks are signaling the beginning of the end.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net. Jennifer Ryan in London at jryan13@bloomberg.net
Last Updated: November 5, 2009 19:01 EST

 

Money isn't 'cheap' with interest rates at zero if you don't have any possibility of repayment of the amout borrowed due to unemployment and wage deflation. End of story.

 

lol, the error of cheap money more like it.

The era of cheap money is here to stay for a decade.

Is Puff the Majic Dragon gone take back on the Obama money printed?

Son, there is a reason Gold is where it is, price levels, and oil is near 80 with out much demand.

Oh yea, the stock market is at 10000 because of the "cheap' Money.

If you take the S&P and work the numbers in the Euro, Yen, it will signal the true picture...Sideways for the last 4 months and looking very very very tired.

A sign of a strong dollar, "LOOK OUT BELOW MR. JONES WHO HAS THAT 401K".

Cheap money is pumped into the system and will stay in a system for some time. Did we all for get the 80s?

Yawwwn.